Daily analysis 06.08.2014

, author:

Marcin Lipka

The combination of negative news for the EUR/USD – increased tensions between Russia and the West, strong US reading, hawkish Fisher comments and weak German readings. The forint slumps to two-year lows. The zloty is significantly weaker in line with the Euro-dollar sell-off, equities' slide and rumors on possible Russian military intervention in Ukraine.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • No macro data which may significantly affect the analyzed currency pairs.

Geopolitics again. Strong US. Weak Germany. The forint

Press reports (“FT” and “NYT”) on Russian military buildup near the Ukrainian border and rumors on possible intervention was the most visible catalyst that worsened sentiment across most asset classes. Investors speculate that Moscow may intervene using the “humanitarian” pretext. Kremlin does not seem to deny the idea to cross the border but claims it will be rather peacekeeping mission. Vitaly Churkin, Russian envoy to the UN proposed to “sent convoys of Russian humanitarian aid under the auspices of the International Committee Red Cross” reports the government funded English TV station Russia Today. No matter what the real intentions of the Kremlin are, sending troops in the current situation would not rather calm the situation in the region.

The dollar was not only supported by the traditional “risk off” trade but also by solid macro data. The non-manufacturing ISM index rose to the highest level in more than three years and significantly exceeded market expectations (58.7 vs 56.5). Bulls on the greenback should be also happy by the subindexes performance. Both new orders and employment recorded significant gains increasing the odds that the FOMC may hike the rates earlier. Moreover, the factory orders rose much more than the Bloomberg consensus was predicting (1.1% m/m vs +0.6). Both figures give the impression that the US economy is ready for another solid quarter.

The data was quickly commented by Richard Fisher (voting, hawkish). The president of the Dallas Fed said on Fox Business that the economy is getting steam and the incoming readings are in line with his bullish predictions. It is a clear signal that the rates should be raised sooner rather than later. Fisher was also asked why didn't he dissent during the last FOMC meeting (as Plosser did). The Fed's member replied that the Committee is heading toward his direction (earlier hikes stronger economy) so he didn't feel the need to dissent. If this is the case, we should get pretty hawkish minutes (in two weeks), which may give an additional boost to the US currency.

After a relative good PMI readings (but a bit softer than the preliminary publication) and strong retail sales in the Euro on Wednesday morning we received weak factory orders from Germany. Despite the fact that the data is characterized by a strong volatility (strong swings between negative and positive territory) the slide by minus 3.2% m/m seasonally adjusted with expectations hovering around +1% are not a good indicator for the Q2 GDP. Moreover, according to the German statistical office we observed the huge slump in orders from Euro area countries while the domestic demand remained flat. It means that the Euro area is slowing not due to Russian issues but because its internal weakness.

The forint was hit pretty hard due to the risk aversion rise. The Hungarian currency slumped to two-and-half-year lows. It weakness is derived from an unprecedented monetary policy easing which cut the benchmark by 490 bps in two-year easing cycle. We should also not forget about pretty close ties between Budapest and Moscow. Currently, however, due to much stronger UE stance toward Kremlin this connection may be softened and the probably Hungary will be casualty of that separation. In result the further sentiment deterioration should easily push the EUR/HUF above recent highs toward 320 level.

Summarizing, the fairly relaxed atmosphere from the beginning of the week vanished pretty quickly. The geopolitical tension and solid US data pushed the EUR/USD lower. It is not a panic sell-off but a rapidly ended correction is not a bullish sign and the odds for testing 1.33 this week increased significantly.

Above 4.20

The zloty consolidation has ended quite rapidly. The dollar appreciation caused by geopolitical tensions and solid US data pushed the zloty lower to 4.20 per the Euro. Additionally, the EUR/USD slide gave even more support to the USD/PLN pair which topped 3.15 level (this time the technical analysis worked perfectly well).

Currently we are not observing any positive signs for the zloty on the horizon. The weak Euro condition, tensions between the West and Russian and increasing pressure for the MPC to cut rates combined with weakening domestic economy are strong elements weighting on the PLN.

Summarizing, the increased volatility on the global markets, geopolitical risk and weaker economy are the sings that the zloty may enter into a period with fairly large swings. Today we should move significantly above 4.20 per the Euro, but at the end of the week we should not exclude to possibility that the EUR/PLN may rise toward 4.22-4.23 and the Swiss franc and the dollar may top 3.47-48 and 3.17-18 respectively.

Expected levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.3550-1.3650 1.3450-1.3550 1.3650-1.3750
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.0800-3.1200 3.1000-3.1400 3.0600-3.1000
Range CHF/PLN 3.4200-3.4600 3.4200-3.4600 3.4200-3.4600

Expected GBP/PLN levels according to the GBP/PLN rate:

Range GBP/USD 1.6750-1.6850 1.6850-1.6950 1.6950-1.7050
Range GBP/PLN 5.2500-5.2900 5.2700-5.3100 5.2900-5.3300

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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